January: results and trend setting

HomeNewsJanuary: results and trend setting

Cyprus: 2017 results

2017 was a year of profound change in home and foreign policy of the Republic of Cyprus. The government signed a memorandum of understanding with Greece, Italy and Israel to support the construction of the East Med gas pipeline, which is to connect new fields in the region with the rest of Europe and as planned should extend over 2,000 km passing through Israel’s Leviathan and Cypriot Aphrodite fields and reaching Greece and Italy. The project’s estimated cost is some EUR 6 billion with an annual capacity from 12 to 16 billion cubic metres.

The project will ensure a direct transit of gas from Cyprus and Israel via Greece and Italy on to other EU markets thus increasing Europe’s security and independence in the energy field.

In the year 2017, the country also saw some radical change in the structure of the National Guard, revision of the munition and a reduction of the army service term from 24 to 14 months as well as an expansion of professional army capacity. The country’s Ministry of defence is engaged to purchase helicopters and drones under the framework of the army’s restructuring and modernisation.

Today, the economy of Cyprus is growing at a healthy rate. The island state is back on the markets offering the cheapest loans over the last 15 years. The rating agencies estimate that Cyprus is a step away from getting profit off the capital investment. The economic growth increased by 3.9% reaching one of the highest scores in Europe. The budget is likely to stabilise with the apparent signs of generated profit while the unemployment is down from 16.5% to 10.3% with an objective set on a single-figure level.

Some radical changes were introduced in health care to improve client service. The most welcome change was the new bill on the universal health care system voted unanimously. Cypriot cabinet approved the bill that offers all students of the island’s universities free medical care at the public hospitals.

Last year also saw a good performance in the real estate sales. According to the Public land registry, foreign citizens acquired over 2,000 properties or 45% more than last year. Most popular in terms of sales is Paphos, then Limassol and Larnaca, Famagusta and Nicosia. The government cancelled the property tax also introducing tax benefits for the new investment projects, in either real estate or business acquisition, with purchase taxes cut by half. The local property sales are also up, possibly stimulated by the cheapest loans in the last 15 years and the falling unemployment.

No need for USD: why china sets to trade O&G futures in yuan

The United States officially advised the World Trade Organisation (WTO) that they would not recognise China as a market economy. The European Union shows solidarity with Washington. The Chinese authorities would like to achieve a ’free market’ status to get rid of the protective measures against their products.

Earlier, as part of an anti-dumping investigation into the supply of the Chinese aluminium foil, the US Department of Commerce has already refused to recognize China as a market economy.

At the same time, the European Union has adopted new anti-dumping regulation that allows introducing a special import policy for countries with «significant market distortions», practising «social and environmental dumping».

Expectedly, these actions caused an outrage from Beijing. As observed by an official representative of the Chinese Ministry of Commerce, the US statements «reflect a serious distortion of the real situation in China», he also called on the US side to «take real steps in correcting these errors,» Xinhua news agency reports.

The United States continuously conduct the anti-dumping revisions of the Chinese products, at the same time relying on the rules applicable to countries with non-market economies. The Chinese had hoped that the recent visit of the US President Donald Trump to China would allow to alleviate at least some of the trade disagreements.

In spite of signing of corporate trade agreements between the two countries worth USD 250 billion, there was no major breakthrough at the state level. Apparently, Trump expects an all-round policy — not a few singled-out concessions. The US leader is convinced that the trade relations with China bring no profit to the United States as the US imports largely exceed the exports to China. Trump’s objective is to change this dynamic. The denial of a market status of the Chinese economy and the anti-dumping investigations are both the elements of this economic war.

China however has something to pull out of the sleeve, and this response albeit not so straightforward, may become quite effective.

The PRC continues to press the United States on the global FX arena. Recently, Beijing has achieved inclusion of the yuan in the IMF currencies basket; the next step is the campaign against the US dollar as a universal O&G settlement tender.

According to the plan made public, by the end of 2018 one of the Chinese stock exchanges may start trading oil futures in Yuans, directly convertible into gold.

The oil—yuan—gold combination might become quite attractive for the investors and oil-producing countries, primarily for those with a conflict of interest with the US, such as Russia, Venezuela, or Iran.

At the same time, Russia is the largest oil supplier to China. During the month of October alone, the supply amounted to 4.65 mln tons. Saudi Arabia ranks second with 4.61 mln tons, while the third exporter to China (with 3.57 mln tons) is Angola.

According to analysts, the sale of oil futures in Yuans became an instrument for de-dollarisation of both the O&G market and the entire world economy. This progress, however, is quite slow, but from now on oil producers are about to take strategic steps in the exchange of oil for gold or treasuries, depending on their expectations.

«On top of this China is set to allocate a greater market share to those countries that would agree to trade oil futures, nominated in RMB. The largest trade partners of China will be forced to resort to the new instrument in order to preserve their market share. The result will be a gradual de-dollarisation,» the analysts observe.

Analysts believe that the impact on the USD monopoly in O&G sector by this new derivative (once it is launched) will be very moderate, and for the time being it should not be regarded as a serious threat to the US dollar’s dominant position around the globe.

Volumes of the oil market and the gold market are not comparable, experts say. Therefore, the promised gold standard is hardly possible if the actual metal itself is used (in that case, there simply won’t be enough gold). Thus, it would be certain gold derivatives.

At the same time, experts agree that, evidently, the US dollar is gradually losing its status of the main currency for exchange. The appearance of the euro, the rapid rise of the Chinese economy, the plans of several post-Soviet, Middle Eastern and Asian countries to switch to settlements in regional currencies, — all this turned the US dollar into a measure of value rather than an inevitable transaction currency.

Reducing dollar dependency became a trend, gaining lots of attention from the BRICS countries (i. e. Brazil, Russia, India, China and South Africa).

Russia and the BRICS countries share concerns over the partiality of the global financial and economic system, which does not take into account the growing weight of the emerging markets.

On top of the imminent rise of the oil-backed Yuan and the settlements in the national currencies, one recent initiative suggests creation of a universal system of gold trading within the BRICS bloc.

«The traditional system, where all transactions had to go through London and, partly, through the Swiss banks, is losing its relevance, with the emerging gold trading centres, such as India, China and South Africa», commented Sergey Shvetsov, the CBR first deputy chairman. «Discussions are under way, among the BRICS partners and through the bilateral relations, of the possibilities of setting up a common market for trading gold.»

The Bank of Russia has already signed a memo on the development of mutual gold trade with the Chinese partners. The first steps to create a new gold trading system might likely be taken in 2018.

All these initiatives are not about to perturb the dollar status quo anytime soon. It is worth noting here that China often underwrites policies with a long run view.

Cypriot parliament to debate on large cash transactions

A new bill banning cash transactions of sums over EUR 10,000 is due to be voted in the Parliament of Cyprus in the near future.

Should the deputies vote in support of this law, any transfers of amounts over EUR 10,000 will be considered as an offence, subject to a 10%-fine to be levied on the transaction amount.

In simple terms, the purchase of goods or services for a large amount would require paying other than in cash, either using a credit card or making a payment via a mobile device.

Chairman of the Parliamentary Committee on Legal Affairs, Yorgos Georgiou said recently that an amendment to the original draft submitted by the Cabinet and prohibiting cash transactions above EUR 10,000 would apply only in certain cases, to goods or services that might be potentially used for money laundering. These include precious stones and metals, cars, works of art and antiques.

However, as Georgiou observed, in anticipation of a new EU directive on the issue, the bill might be amended at the request of the European Union, to include all goods and services.

The aim of the EU Directive 2015/849 is to combat money laundering and the financing of terrorism and organised crime. The directive applies in particular to financial institutions and organisations that are associated with the creation, use and management of trusts, as well as any person engaged in trading in cash with turnover higher than EUR 10.000, regardless of whether the payment is one-off or is divided into several traceable linked transactions. This also applies to gambling.

Within the framework of this directive, the EU has already stopped printing the 500 euro banknotes. So far, there are no restrictions on the amount of cash transactions in Cyprus.

EU council approves grey and black offshore lists

At a meeting in Brussels in the end of 2017, the EU Council on Economics and Finance approved of a new black list of offshore constituencies, which included about 20 states and territories, in particular, some islands with broad autonomy rights. The European Commissioner for Economic and Financial Affairs, Taxation and Customs Union Pierre Moscovici made a statement. According to him, a grey list of nearly 40 states was also adopted. On it are the countries that promised to eradicate offshore practices in their legislation, ensuring the fiscal and tax transparency.

«There is a very important issue on the European Council agenda: approval of the first European black list of tax havens. This is the first draft following years of investigative work. The list includes about 20 countries and territories that, after 10 months of negotiations (with the EU represented by the European Commission), have made no necessary commitments [in the sphere of financial transparency],» the Commissioner said. «In addition, a grey list was approved, which includes about 40 states that made the necessary commitments, and their implementation should be monitored,» Moskovici observed.

A special work group of the European Commission was engaged in drafting both lists. It examined more than 90 states and territories for compliance with the tax rules and analysed the results of their negotiations with the European Commission to review the financial legislation increasing transparency.

According to Pierre Moscovici, the EU will not include Luxembourg in its black list, as «there are no offshore companies in the European Union». «A tax haven is determined by a set of criteria, including observance of the international standards in the field of information exchange. The EU countries respect these standards,» Moscovici said while commenting to the press the possibility of blacklisting problematic EU territories (from the point of view of fiscal practices), including Luxembourg and the British Isle of Man.

In order to avoid being included in the black list, the countries must meet several criteria or promise to implement the necessary reforms. Most importantly, they must have clear and fair tax rules without special terms and conditions that would allow companies to export profits and avoid paying taxes. They also need to introduce transparency standards for companies.

Russian business in Cyprus

At the end of 2017, the Cyprus-Russian Business Association conducted a survey to assess the quality and the efficiency of operations set up by the Russian executives living and/or working on the island.

The respondents acknowledge the presence in Cyprus of a wide choice of mediation firms with Russian-speaking staff (53%) as well as the fact, one may easily find Russian-speaking employees in Cyprus (65%).

Moreover, 83% of the Russian business holders appreciate the island’s favourable tax legislation and its stability, with its large number of double taxation treaties with other countries, Cyprus’ EU membership and a high level of professional and legal services on offer.

Most companies owned by Russians are Limassol-based (69%) with 29% located in Nicosia and 1% in Larnaca. Over 60% of businesses started operations in Cyprus in the last 10 years.

The study revealed that 19% of the Russian-owned companies in Cyprus work in the investment field, dealing in stock exchange and brokerage services, 9% are in real estate and construction sector, with similar numbers in accounting services, and 8% in both mining, O&G sector and software development. About 5% of companies operate in media management, shipping, wholesale and retail sectors, legal and business consulting.

More than 60% of respondents note that Cyprus fully met their expectations, and only 12% expressed their disappointment with conducting business on the island. The top complaints include the Cyprus bureaucracy (more than 40% of respondents) and deficiencies of the banking sector (about 33%). Among other issues is the small size of the local market, limited air links with the rest of the world and the lack of qualified personnel.

Public institutions that fell short of approval include the State Departments of Migration, Land Resources and Urban Planning. The most satisfactory, on the other hand, is the work of the Department of Registration and Liquidation of Companies, as well as the Tax Service.

Sanctions: who is the loser?

Following the introduction of economic sanctions the EU exports to Russia fell by EUR 30 billion; Germany suffered the most. What about Moscow? Economically it feels better than ever.

Recently, the Germany’s Free Democratic Party (FDP) stepped up with a clear criticism of the German and European stance towards Russia. The liberal party’s President Christian Lindner insisted on the necessity of improving relations with Russia. As it became clear that Germany lost some EUR 11.1 billion, disputes intensified. An analysis by the Austrian Institute for Economic Research (Wifo) revealed a number of economic consequences of sanctions for the EU countries. The study, commissioned by the European Parliament, shows that so far the sanctions have already cost the EU states EUR 30 billion.

According to the Austrian experts, the EU exports to Russia fell from EUR 120 billion in 2013 to EUR 72 billion last year. This is certainly provoked by the decline in oil prices and the weakening of the Rouble.

However, according to the Wifo analysis, the economic sanctions account for a significant part of this fall.

The heaviest burden fell upon Germany with its loss of EUR 11.1 billion, undoubtedly since the country occupies one of the leading positions on the list of the EU exporters to Russia. The country is followed by Poland, Great Britain and France.

In regard the loss as a share of total exports, the list looks quite different. Cyprus lost over a third of its business with its major trade partner. Greece (-23%) and Croatia (-21%) also suffered particularly large losses. For Germany, EUR 11.1 billion mean, in fact, that the country’s exports to Russia fell by 13.4% compared to the pre-sanctions level.

Russian economy regenerated

These figures do not reveal the whole picture of the true volume of losses. Prior to the imposition of the embargo, economic cooperation between Russia and the EU was flourishing. Between 2009 and 2012, exports to the east increased by an average of 23%. Russia became the fourth largest trading partner of the European Union.

Should the growth have continued, the cost of losses would have clearly been higher than EUR 120 billion in 2012 figures, while the billions worth of losses would be, accordingly, more important than the current ones.

The results of the analysis are even more astonishing since the idea of putting Russia in a difficult economic situation is clearly not working. Following a somewhat troubled period immediately after the introduction of sanctions, Russia’s economy is now recovering. The recession seems to be done with. According to the analysts, in the current and the next years the economy may grow by 1.7%.

Generally, Russia has significantly reduced its dependence on the goods from the West. Rather than focusing on the US dollar as a leading currency, the CBR kept buying gold. According to the World Gold Council, the country has amassed 1,716 tons of gold, which is approximately 700 tons more than before the crisis hit the relations with the West. Gold and FX reserves are exceed USD 420 billion, which is USD 70 billion higher than the current reserves during 2015 crisis.

Investors reopen credit lines for Moscow

Back in March last year, the leading rating agency S&P raised the ranking for Russia to «positive». Soon the country might return among the stable states under the status describing an «opportunity for investment».

In financial markets, once again regard Russia as a reliable debtor. The FX players assess the probability of bankruptcy as less than 10%. During the escalation of the crisis in spring of 2015, this estimate was over 30%. Sanctioned Russia is still considered more reliable than the euro economy of Italy, which all rating agencies rank as «acceptable for investment». A return of a positive credit rating to Moscow is now a matter of time.

However, the investors are happy to give out loans to the country. Last summer, when relations between the Kremlin and the White House hit the rock bottom, Moscow received three billion US dollars on financial markets. This sum might obviously have been even higher.